Saving even a little bit of money each week or each month can be very beneficial to your financial future.
A simple equation for saving
The equation for saving money is pretty simple. You want to make more than you spend and put the unspent money away. But exactly how much do you need to save? Probably not as much as you think.
The key to building wealth is not saving a lot of money, it is saving money consistently in an interest-bearing account where it can earn compounding interest.
The sure way to build wealth
Compound interest is not an exciting, get-rich-quick idea. If you search online, you will find millions of articles and blog posts about getting rich through real estate investing or the stock markets. You will find very little about compound interest. However, if you are able to put your money in an interest bearing savings account, the deposited amount will, eventually, double or even triple.
If you put $100 in savings account with a three percent interest rate, it will take roughly 23 years to turn into $200. That is $100 in “free money,” but on its own, this figure is really not that impressive.
If you save $100 every month, however, the equation starts to get a little bit more interesting. $1,200 for a year will become $2,400 in the long term. If you can find an interest rate that is higher than three percent, the doubling will happen sooner. A five percent interest rate will double your money in 14 years. An eight percent rate will turn $100 into $200 in nine years. And 10 percent will double once every seven years. If you can find a fund that offers a 10 percent return, your $100 will turn into $800 in 21 years.
What does this mean for the short term?
Saving money is not exciting, and it will take a long time to see big results, but if you can be patient, those results will come. The easiest way to stick with the compound interest/wealth building strategy is to plan to save a certain amount each month.
Unexpected expenses will come up. Rather than dipping to your savings account when this happens, you can apply for an online personal loan. These loans are easy to get, even if you have a poor credit history. They can help you until your next paycheck arrives without forcing you to take money out of your savings. Then, once you have paid off your online personal loan, you can get back to your monthly saving habit.